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A Primer on Insurance Underwriting in China

Insurance Law360
June 10, 2015

By Jiangxiao Athena Hou, Qianwei Fu and José Umbert
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China is one of the largest and fastest-growing insurance markets in the world. It provides the global insurance and reinsurance industry with tremendous opportunities but also presents challenges with its unique legal and regulatory systems. Understanding this environment is a first step for global insurers and reinsurers who look to expand their presence in China. This article provides a primer on China’s insurance legal framework and highlights several key considerations in underwriting and claim handling.

China’s Insurance Market and Its Regulatory Framework

Strong Growth Prospects

China is currently the world’s fourth largest insurance market. Fueled by the world’s second largest economy in GDP, it has grown from $52.2 billion (RMB 0.43 trillion) in primary insurance premiums in 2004 to $329.4 billion (RMB 2.02 trillion) in 2014, at an average annual growth rate of 16.7 percent. By year 2020, China is expected to become the world’s third largest insurance market, following the United States and Japan.

China’s insurance market will remain in a golden era of relatively rapid growth for a long period ahead, given its low insurance penetration, robust economy outlook and a clearly stated government desire to internationalize. Its insurance penetration rate is still low at 2.96 percent at the end of 2012 compared with 6 percent to 12 percent in mature markets around the world. Insurance density is also low at $178.9 in 2012 compared with $2,000 to $7,000 per capita in mature markets. China, having the world’s largest population, leads the world’s economic growth by size and speed. These factors make China a highly desirable insurance and reinsurance market.

Insurance Regulatory Framework

It is imperative but challenging to stay current with China’s constantly-evolving insurance regulations. The Chinese insurance regulatory regime consists of laws enacted by the National People’s Congress, administrative regulations issued by the State Council, a myriad of rules and guidelines issued by the Insurance Regulation Commission (CIRC) and other ministries and judicial interpretations issued by the Supreme People’s Court.[1]

Chinese insurance law provides the basic regulatory framework. It governs all insurance activities in China, except those specifically addressed by maritime law and agriculture insurance related regulations. The insurance law covers a comprehensive set of topics relating to insurance but contains only a few provisions specific to reinsurance.

The CIRC is the primary insurance regulator. It has extensive authority and powers to regulate the insurance sector. Following the 2009 amendment of theInsurance Law, the CIRC issued about 700 new regulations in that year alone. The CIRC is empowered to impose a number of penalties, including fines, rectifying orders and revocation of business licenses.

A company can engage in insurance activities only if it is registered with the CIRC. An insurance company can engage in either property related insurance (property, liability and credit insurance) or personal insurance (life, health and accident insurance). Insurance companies having a 25 percent or more foreign shareholding are deemed foreign-invested and are subject to different and more detailed regulations by the CIRC, in particular with respect to ownership, product offering applications, branch approvals and reporting and disclosures.

Important Issues Concerning Underwriting

Insurers need to be aware of the varying regulatory and legal requirements for underwriting and claim handling in China. A legal person or entity in China can only obtain domestic coverage from an insurer registered with the CIRC.[2]

Formation of Insurance Contracts

Insurance policies in China are considered contracts whereby an insurance applicant pays a premium in exchange for an insurer’s commitment to pay indemnity and insurance benefits upon the occurrence of an insured event. An insurance contract must include: the parties’ names and addresses; the subject matter of the insurance; the policy’s scope of coverage and exclusions; the policy period; the insured amount; the insurance premium and payment method; the indemnity and payment method; liability and dispute resolution; and the date of contract execution. [3]

An insurer is required to explain to an insurance applicant the policy terms.[4] In particular, an insurer is required to “clearly explain” exclusion provisions and to provide adequate warning about exclusion provisions in the insurance slip, policy and/or other insurance documents.[5] An exclusion provision not properly explained will be voided.[6]

The Insurance Law provides very limited guidance on reinsurance contracts. Most significantly, the ceding insurer is required to provide all relevant information of the underlying policy to the reinsurer; the direct insurer’s insured shall not demand the reinsurer to pay indemnity or insurance benefits; and a reinsurer’s inaction does not excuse the direct insurer from fulfilling its obligations. In practice, reinsurers look to Chinese contract law and civil procedures for general guidance.

The CIRC’s Product and Rate Filing Requirements

All insurance products distributed in China need to be either preapproved by the CIRC or post-registered with the regulator.[7] Insurance clauses and premium rates of certain insurance products must be approved by the CIRC before use. Other insurance products must be filed with the CIRC within 10 days after sale.

Direct insurers are required to file with the CIRC reinsurance contracts and other specific information annually.[8] Foreign invested insurers are required to file with the CIRC, among other things, slips of reinsurance contracts they entered into with affiliated companies.

Important Issues in Claim Handling

The Good Faith Principle

A fundamental principle in ChineseInsurance Law is the “good faith” requirement. It applies to all types of insurance contracts, imposing a continuing duty on the insured and insurer both precontractually and post-contractually.

A primary application of “good faith” is an insured’s obligation of disclosure in its application for insurance. An insurance applicant is required to “make an honest disclosure” in response to the insurer’s inquiry about “the subject matter of the insurance or relevant circumstances concerning the insured.”[9] Information an insured is required to disclose is limited to the scope of the insurer’s queries. An insurer has the burden to prove the scope of its inquiries.

An insurer has the right to cancel a policy if the applicant intentionally or in gross negligence fails to make an honest disclosure, thereby materially affecting the insurer’s underwriting decisions.[10] This cancelation right extinguishes within 30 days after the insurer knows about the failure to disclose. Notably, the law prescribes different remedies for intentional concealment and negligence. Where an insured intentionally fails to disclose information, the insurer is not liable to pay indemnity or return premium. Where nondisclosure as a result of gross negligence has a significant effect on the insured event, the insurer is not required to pay indemnity but must return premium. In litigation, a court has broad discretion to determine if the undisclosed facts are material to the insurer’s underwriting and premium-setting decisions.

An insured must also inform the insurer if the risk of the subject matter insured under the policy increases significantly during the term of the policy so that the insurer can either increase the premium or terminate the policy.[11] Where an insured fails to notify the insurer about an increase in risk, the insurer can refuse to pay indemnity.

It is prudent practice for an insurer to be vigilant about potential undisclosed information relevant to coverage, premium rates and risk of the insured subject matter and to inquire timely about such potential issues and avoid delays in exercising its rights when an insured fails to comply with these disclosure requirements.

Reservation of Rights

It is important to note that certain customary practices in Western countries do not necessarily have the same ramifications in China. In the United States and the United Kingdom, when coverage is questionable, the insurer typically issues a reservation of rights letter (ROR) to avoid waiver and estoppel applications and to preserve its coverage defenses. In China, there are no legal ramifications to the issuance or nonissuance of a ROR. Nor is it a customary practice.

The Claim Handling Process

Chinese law provides a structured schedule for adjustment of a claim. After an insured event occurs, the insured or the beneficiary must notify the insurer in a timely manner.[12] The Chinese Insurance Law does not provide a definition of “timely manner,” but its determination is based on the principle of good faith. An insured or the beneficiary has a duty, to the best of its knowledge and ability, to provide the insurer, along with its notice of claim, with all evidence and information relevant to the determination of the nature and cause of the insured event and the extent of loss.[13] The insurer has the right to request that the insured supplement claim-related information “once and for all.”[14] If an insured lodges a fraudulent claim, the insurer has the right to terminate the insurance contract, refuse to refund any paid premium and seek refund of any indemnity paid.[15]

An insurer must make a timely coverage determination. In complex cases, absent a provision to the contrary in the insurance contract, an insurer must issue a coverage determination within thirty days upon completion of gathering all claim-related information.[16] The Chinese Insurance Law provides no standard on when collection of claim-related information is deemed complete. Notably, the good faith principle likewise applies in this situation.

Where an insurer determines there is coverage, it is required to pay indemnity or insurance benefits within ten days after it reaches an agreement with the insured or the beneficiary on payment.[17] If an insurer cannot determine coverage of a claim within sixty days of its receipt of the claim and relevant evidence, the insurer must pay an amount determinable with available information. The balance is due when the insurer determines the entire amount.[18] An insurer must notify the insured of its coverage denial decision with stated reasons.[19]

Conclusion

While China presents tremendous opportunities for international insurers and reinsurers it is critical to be mindful of its regulatory regime including the issues summarized above. Insurers should be apprised of the insureds’ duty to disclose information relevant to underwriting and premium-setting decisions and its rights in the event there is an increase in risk. Certain practices such as ROR issuance are routine in western countries, but bear no legal effect in China. Rather, it is important to understand the 30-day adjustment requirement, which is contingent on when all relevant information has been collected. An insurer should carefully review claim-related information, conduct its own investigation at the outset of its receipt of the claim and request any additional information relevant to the claim.

—By Jiangxiao Hou, Qianwei Fu and Jose Umbert, Zelle Hofmann Voelbel & Mason LLP

Jiangxiao Hou is a partner and Qianwei Fu is a senior associate in Zelle Hofmann’s San Francisco office.

José Umbert is a partner in Zelle Hofmann’s London office.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of the firm, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] The SPC issues Judicial Interpretation to direct lower courts at all levels in applying laws.

[2] Chinese Insurance Law, Art. 7.

[3] Id., Art. 18.

[4] Id., Art. 17.

[5] Id., Art. 17.

[6] Id.

[7] Id., Art. 135.

[8] See CIRC Administrative Measures on Reinsurance Business (effective as of July 1, 2010), Art. 28.

[9] Chinese Insurance Law, Art. 16.

[10] Id., Art. 16.

[11] Id., Art. 52.

[12] Id., Art. 21.

[13] Id., Art. 22.

[14] Id.

[15] Id., Art. 27.

[16] Id., Art. 23.

[17] Id., Art. 23.

[18] Id., Art. 25.

[19] Id., Art. 24.

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